Use the following three statements to answer this question:
I.A security with a beta of zero implies that all of the variability in this security's return is diversifiable by any investor holding a well-diversified portfolio.
II.A security with a beta of 1 implies that if the market increased (or decreased)by 1%, the return on the security would increase (decrease)by more than 1% on average.
III.A security that has a beta value cannot be priced.
A)I, II and III are correct.
B)I, II and III are incorrect.
C)I is correct, II and III are incorrect.
D)I, II are incorrect, III is correct.

Question

Quizplus · Accepted Answer

Statement I is correct as a security with a beta of zero means it is not correlated with the market and all its variability can be diversified away. Statement II is incorrect as a beta of 1 means the security moves in line with the market, so if the market increases by 1%, the security will also increase by 1%. Statement III is also incorrect as a security's beta value can be calculated and used in pricing models such as the CAPM.

Use the Following Three Statements to Answer This Question